'Why I'm sticking with Vodafone shares'

Martin Cholwill of the Royal London UK Equity Income Fund explains what he's
holding at the moment in his fund, including his Vodafone stake.

Royal London equity fund manager Martin Cholwill believes a strong cash flow is key for investors when assessing a company’s ability to pay a dividend.

Mr Cholwill, who took over the running of the Royal London UK Equity Income fund in 2005, said: “When you are investing in equity income, the key thing is to invest in companies where the dividend is sustainable and where that dividend can grow. Looking at cash flow is a key measure of value.”

The Royal London UK Equity Income fund invests in high-yielding UK stocks and its performance puts it in the top 25pc of funds over one, three and five years.

Mr Cholwill likes to invest in medium-size companies, although many of the top fund holdings are income heavyweights like AstraZeneca and BP.

“You could have a portfolio that is full of these mega-cap shares, but I’ve been able to find a lot of good opportunities elsewhere,” he said.

In the latest Your Money, Their Hands video, Mr Cholwill highlights several medium-size companies he likes, including Dunelm, the homeware retailer, and the Restaurant Group, which owns brands like Frankie & Benny’s and Garfunkel’s.

He is more cautious of domestic UK banks.

“The problem with banks is they have been heavily politicised since the credit crunch,” he said, “and there are lots of opportunities to invest outside the banks with no political interference.”

One of his biggest holdings is Vodafone Group, which recently announced that it was selling its stake in the American mobile phone network, Verizon Wireless, for £85bn.

The deal means shareholders will be left with Verizon shares, which are US quoted and may not be suitable for UK investors. The remainder of Vodafone Group will be much smaller and will mean shareholders will get a smaller income and a dividend cut for the UK market.

Mr Cholwill advised investors to review their holdings after the deal is completed.

What are the alternatives?

In the tightly contested sector of UK equity income, it would be a mistake to overlook the Royal London UK Equity Income fund in favour of higher-profile names, said Ben Willis of advisers Whitechurch Securities.

Manager Martin Cholwill has established an “excellent long-term track record of outperformance”, he said, and his approach offers an alternative to traditional equity income funds as he invests more in medium-size companies than his peer group.

“The fund generates an income from generally seeking out-of-favour companies that offer higher yields than the market,” said Mr Willis. “Though we do not currently invest in the fund ourselves, it is one that we monitor closely and I would put it as a 'buy’.”

Mr Willis also liked the Artemis Income fund and the CF Miton UK Multi Cap Income fund as possible alternatives. “Artemis Income is a multi-billion pound, established fund with an exceptional long-term track record,” he said. Manager Adrian Frost is “pragmatic” and adapts his investment style to market conditions.

“While the fund promotes relative freedom from formal benchmarks, Mr Frost will keep close control of risk,” said Mr Willis.

The CF Miton UK Multi Cap Income fund, launched in 2011, focuses on high-quality UK stocks with a bias towards smaller firms. It is managed by Gervais Williams, a “proven small-company investor”, he said.